Pursuant to section 67 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, property that is exempt from execution or seizure according to provincial legislation retains its exempt status in bankruptcy and is not divisible among a bankrupt’s creditors.
In Bankruptcy of Edward Petz, 2023 MBKB 20, the Court considered whether the pension of a bankrupt, which was exempt on the date of bankruptcy, retained its exempt status on the death of the bankrupt before his discharge. The bankrupt had a pension with no designated beneficiary, and had no dependents. Pursuant to Manitoba legislation, the exemption only extended to a spouse of the pension member or a designated beneficiary. As the bankrupt did not have a spouse or a designated beneficiary, the pension was payable to the bankrupt’s testamentary estate.
The trustee in bankruptcy claimed the pension funds on the basis that the exemption was personal in nature and ended on the bankrupt’s death, such that the pension funds were divisible among the bankrupt’s creditors when the bankrupt died. The bankrupt’s testamentary estate argued that the exempt status of the pension funds crystallized on bankruptcy and could not change during the administration of the bankruptcy.
Ultimately, the Court followed recent decisions in other provinces and determined that the exempt status of property on the date of bankruptcy can be revisited during the administration of the bankruptcy. The Court held that the pension funds lost their exempt status on the death of the bankrupt. Bankruptcy exemptions are personal in nature and designed to preserve the viability of debtors, which is connected with the objective of financial rehabilitation in a bankruptcy. When a bankrupt dies before discharge, the objective of financial rehabilitation ceases to inform the administration. As the pension funds were not payable to a spouse or designated beneficiary, and the bankrupt had no dependants, the funds were payable to the trustee in bankruptcy to be divided among the bankrupt’s creditors.
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